This article is long and perhaps even tedious. Forgive me for that. There’s a lot I want to cover.
I know things look like hell in a hand basket at the moment, but I think things are proceeding according to my expectations. I also know that it’s been frustrating the last few days as the market capitulated, but I have not been interested in that because—to my mind—that is chasing into a low, and much like chasing into a high presents us with great danger, so does, I believe, trying to catch every inch of this move down we’ve had. I think we’re bottoming, and that can reverse sharply at any moment, and I’m in no mood to be caught in that.
I could also be wrong here, and I will be the first to own that if I turn out to be. But, looking at things as a whole, it seems to me as if half the people who are freaking out about their belief that the Fed has no options here have never actually lived through a rate hike cycle before.
The chorus identifying today with the likes of 2008 seems to me to have not actually lived through that as an adult. This is literally nothing like that. By 2008, people were defaulting on their mortgages in droves and the banks were already starting to crack. Literally the biggest financial giants in the world were crumbling. It was a literal catastrophe. Nothing like that is happening here. At worst, so far, the rate of change of growth has slowed. But we’re literally still growing. And the banks are flush with cash. No stress there whatsoever. And while prices may be a bit high by some measures here, they may not be that high (see my section on prices in this article).
So, if the Fed has to hike quickly to combat inflation, it may eventually have an impact. But keep in mind, in 2008, the Fed was already two years into a hiking cycle. We’ve hardly even had a hike at this point (I covered the timing of hiking cycles and market tops in the second section of this article). Based on that, and the shocking sentiment readings we’re getting here, I think we may have years before we top.
In addition to the points made about sentiment here, where 2 of the worst 23 “bull percent” readings were discussed, we now have 3 of the worst 24 “bull percent” readings, and even better now, the “bear percent” reading this week was the 5th highest ever.
We are right now experiencing a total sentiment washout.
If we were having this price action this year, and everybody interpreted it as a nice, healthy correction, eagerly anticipating new highs, with sentiment surveys bursting with joy and excitement, it’s time to be bearish. But right now, same price action (“every rally fails for months”) and people are calling for Armageddon. In my opinion—and I may be proved wrong about this—I believe this is setting us up for an opportunity that only comes to us a few times in a lifetime. Mid-nineties sort of rally material is possible to us here.
I know we’re all enjoying making fun of David Hunter and his ad nauseam melt-up call, but he is effectively right. Bear in mind, the man has been in the markets for decades, and he is basically right regarding sentiment. We’re nowhere near a euphoric high. He’s right about that, I think, and yes, it is funny that his wanting to make the big call keeps getting stuffed in his face. That actually serves his call well now, as now that he’s become a meme, people will laugh at his next melt-up call, and I bet that’s when we get it.
The other day, I referred to a structure on Apple and I want to discuss it at greater length here.
This channel, despite moving “up,” is still effectively “consolidation,” because of its choppy nature:
And whenever we have consolidation, it is either accumulation or distribution. It’s essentially a Wyckoff structure, and “smart money” is either filling their bags or someone else’s. Now who exactly is “smart money”? Well, the real smart money—the smartest of the smart—is institutional funds. Swiss central bank, pension funds, the funds with hundreds of billions.
Now, none of us are that smart, because we’re all hanging out on Twitter and trying to guess what happens next; whereas they know what’s going to happen next because they’re going to make what happens next happen, and institutions are better than anyone else at hiding their intentions from the rest of us. And unless you know a fund manager you can ring up on the phone, we’re going to have to try to make an educated guess here.
If they are distributing, to whom are they distributing? Retail always gets the bag.
If they are accumulating, from whom are the acquiring? If this were a market low, like a clear bear market bottom, I would immediately think “retail,” again. But it’s not clear that we’re at one of those. And yet—as I discussed in my Bitcoin article, I sometimes sort of get the sense that retail has already been washed here (for instance, I read that Robinhood is laying off hundreds of employees—that may mean that no one is using their app like they were). And furthermore, knowing what we know about the AAII survey results—those are smaller fund managers—it’s possible that they’ve already been washed out here, too. If basic retail is broke here, and average fund managers are practically suicidal about the future, someone has nevertheless been buying that Apple channel each and every time it’s touched. Who is that? I have a hard time thinking it’s retail right here, and the AAII surveys are making it hard for me to believe it’s small fund managers either. Anything is possible, but if we do break higher, I think it’s going to go a lot higher, because these structures effectively end up doing this:
I know it looks absurd. What’s their P/E here, 26? It can go a lot higher. In a real bubble, I think the price can go a lot higher. Especially if their earnings keep going up, too.
Now, I’m not calling for this. But, given such a long period of consolidation on so may names (and indices—Amazon, the Russell), we need to be open to the possibility that we’re ending a re-accumulation. And how do those end? Typically with a sharp drop that pukes out all weak hands so they won’t participate in the markup. And look what April has been like. Institutions aren’t here to do anyone any favors. They don’t want people to ride if they can get away with it. If this breaks down, so be it. But it hasn’t yet.
Moving on to the main attraction, the S&P 500. This will be tedious, but if we do start rallying, I think you will find this part useful (if we crash Sunday, I’ll just delete this post, lol).
A significant part of trading is figuring out where other traders are going to get it wrong. If you’re familiar with the Pareto principle, you’ll know immediately what I mean. In essence, it says that with many phenomena in the world, a majority of the effects are caused by a relatively small number of causes. For instance, 80% of the trash in the oceans comes from 20% of the rivers. And it gets even more narrow, too: it’s why we have things like “the 1%” in capitalistic economies. Hell, even among traders: statistics show that the top 1% of actual traders account for a majority of all traded shares (not long-term buying) and those traders account for a huge outsized portion of the profits made in trading.
Meaning: few get it right, many get it wrong.
In the spirit of that, if we start rallying right away, we already know the bears are going to get it wrong (everyone who thinks we’re in a bear market will get that wrong), and bearish bulls (those looking to buy circa 4000) will also get it wrong, but what about the bullish bulls? And I’ve given that some thought and I have a good idea about that. It’s a bit of a pain to communicate, but I will try, because it gives us a good roadmap.
Just like I now believe a vast majority (bulls and bears) are trying to count this structure in such a way that takes us to 4000 (or lower), I also know immediately how a vast majority will immediately begin to recount the structure if we start to rally hard, and it may give us a unique and very rare opportunity ahead.
(This part is tedious and geeky, so if you hate that stuff, I’ll try to post a summary at the very bottom that you can skip to.)
First, let’s review my basic thought for the time being. I believe we have completed a large A-B-C flat correction, one that may also be interpreted as an inverse head and shoulders pattern. That gives us a target of at least 5180, and it should be one, big wave:
Now, since I am interpreting big pink “C” as being in right beneath us, that huge rally will be “Wave 1” of a very large 5-wave structure. But since literally no one else is counting the “C” right here, that’s what I think is going to throw a lot of people off. Let me explain.
For starters, most people have pink A over at the next low, which is why they’re looking for a lower C here:
So, first off, if we start to rally, they’re not going to trust it because we haven’t hit their target, and they will think this is happening:
And in fact, they may even try to fade it and get squeezed. But, if we continue to rally powerfully, they are eventually going to have to relent and relabel. And I suspect they will move C to the lowest low, like this:
And such a powerful, vertical rally will incline them to believe it’s a third wave, like this:
From this point, there are two choices for them. Many are counting the rally off the COVID low as an impulse, and have a “4” under the pink “C.” For all of them, they will believe this leg up is The Top, the 5th and final wave, top of the bull. So, for them, they will wait for the orange 3-4-5 to finish, and will get bearish up there. Others will think that the orange 5-wave structure is itself just the first of 5 larger waves. So, they will wait for that to finish, and will hope to buy a deep retracement, or even short the retracement:
They may try to short the move from pink 1 to pink 2, and buy the pink 2.
But I don’t think this big proposed rally will be a three, but just a 1, all by itself. And furthermore, after being in this range for so long, I don’t think we’ll reenter it when we’re done. What I think will happen is we’ll get a big “1,” and we’ll do something wild like an expanded flat for the “2,” like this:
In other words, I think they will think my pink “1” is a “3,” my orange “A” up there the “4” and the orange “B,” the “5.” And then they will try to short for a deep 2 that won’t show up. Instead, I think we merely revisit the prior all-time high and then blast off in the most powerful of the waves (the third), leaving bears and bulls alike having missed the best entry in ages (other than perhaps here, if this is the end of the correction). And a lot of the bulls may even get caught short at the worst possible moment.
In sum, I think a lot of people want to buy 4000, and I don’t think the market is going to give it to them. And to pour salt into the wound, I think they will then try to make up for that missed opportunity by buying 4500, and I don’t think the market will give that to them either. To make matters even worse, I think some will be short here expecting lower prices, and some will also be short at 5000, also expecting lower prices, and I think both levels will be blasted in the other direction.
Pareto principle.
Now, I am not personally counting the structure as an impulse (I’ve gotten into why before), and there are many alternatives, but one conservative way is to just call everything from the COVID crash an “a.” And this correction a “b,” and that we have a “c” ahead of us. If (yellow) “c” = “a,” we have a target of about 6800. And that lines up very well with the size of pink “1” that I expect here. It puts the pink “3” around 6300, giving some room for the pink “4” and “5” of yellow “c” to all tie up nicely:
It can actually go a lot higher than this, theoretically, and the dot-com bubble certainly did, on a percentage basis, but let’s not do that just yet.
;TLDR I think we stand a good chance to rally from here without looking back. I think many people will miss it, and then worse, get confused at the 5200 level about what it is they are seeing there, in such a way that causes many people to miss the biggest move ahead, too. We can initially speculate about three targets: 5200, a pause, 6300, a consolidation, 6800 may be the generational top that everyone is looking for here by mistake.
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